Steven Romick On His Favorite Russian Equities

“We” noted yesterday, that Steve Romick was investing big in Russian equities. Readers will probably be excited to learn that Romick will be speaking about his investments abroad on WealthTrack this weekend. We have an exclusive excerpt from the interview with Steve Romick below.

Beginning tomorrow, May 23 at 7:30 p.m. (ET) on WLIW21 (New York) and nationwide on public television (check local listings **), “Consuelo Mack WealthTrack” features a very rare TV interview with “Great Investor” Steven Romick, founder and portfolio manager of FPA Crescent Fund and Morningstar’s 2013 Allocation Fund Manager of the Year. In his first TV interview since January 2014 (for his Morningstar award), the self-professed contrarian value investor discusses why he is investing in Russia and holding large sums of cash in his FPA Crescent Fund.

Steven Romick on why Russia is attractive

“Who would consider investing in Russia right now? When others flee markets and prices plummet, Steven Romick gets interested,” said “WealthTrack” Anchor and Executive Producer Consuelo Mack. “After the big market rally of the last five years, Romick has been taking profits and building large cash positions. One of the few markets he has been allocating to is Russia.”

Steven Romick: “We have a small stake in Russia. I mean, Russia’s interesting, because it’s obviously quite combustible over there right now, and it’s unusual because people are running in fear, and when looking at Russia, you can look at a lot of companies that are actually of strategic importance to the state as well as to the globe. So something you couldn’t say about Venezuela, for example. There might be businesses that are important to the state, but not as important to other countries around the world.

Steven Romick: “Exactly. They’re the largest, the largest hydrocarbon producer in the world, and as far as public companies are concerned, they have the largest reserves in oil in Rosneft’ NK OAO (MCX:ROSN) (OTCMKTS:RNFTF) and the largest reserves, as you mentioned, in Gazprom OAO (MCX:GAZP) (OTCMKTS:OGZPY) in gas. And it’s of strategic importance to the state because energy counts for 25 percent of Russian GDP. It’s 50 percent in Russia of their annual revenues, and representing its strategic importance to the state and how important it is to their neighbors, it counts for 60 percent of their exports. So we understand that there’s risk there. However, these companies are trading at very large discounts to other companies of their ilk. You know, in Exxon Mobil Corporation (NYSE:XOM), for example. So these large discounts, you know, justify the risk of owning some of these companies in Russia, which has an uncertain future. Not that Russia’s future is so uncertain over the long term, but shorter term those correlate some questions, but that’s what created again these natural sellers which allows us to come in and do some buying. But what’s interesting about looking at Russia is that people there seem to be less concerned. There’s massive insider buying in some of these companies. In the last 12 months in LUKoil (OAO) (LON:LKOH) (OTCMKTS:LUKOY) , for example, there’s been a billion dollars purchased from insiders. One may question where they got a billion dollars, you know, but we look at these Russian companies, you know, there’s a fair amount of taxation that goes on by the Russian government, and there’s probably another … call it less official means of taxation in the form of, you know, more nefarious activities occurring within the companies. However, the earnings we see are audited by legitimate companies and these earnings that we’re seeing today are already net of both forms of taxation, and they’re cheap on that basis. So as long as things don’t get worse in that regard, we can be pretty comfortable with these companies that we’re buying at these prices today.

Consuelo Mack: “Okay, so it really is because of the prices? Because I mean, it would make me nervous as an investor to know that you are in basically a thugocracy, as someone told me, with Putin running Russia, and you know, heads of companies get thrown in jail at any given moment if they get too powerful. So for someone who’s most concerned about avoiding the permanent loss of capital, and you always say that your defense is more important than your offense…”

Steven Romick: “There’s no argument that this is a complex country with an authoritarian regime. There’s no argument there. However, again, we feel that price is the guide, and we argue we do play defense first. We think about it in terms of the whole portfolio, so it’s a defensive portfolio. If you’re not willing to lose a little money along the way in certain investments, you’re not going to make money either. So there’s no chance you’re going to go through life and not lose money. So if you size positions correctly, and we believe that our investments in Russia are sized appropriately. Not to say they won’t increase somewhat, but it’s never going to be the largest part of our portfolio for sure for some of the reasons you’ve mentioned, but we certainly are willing to accept some risk attached to that. And don’t forget, you can’t steal from something that’s insolvent, right? So the country needs these companies to continue to spew off cash. Again, 25 percent of GDP, 50 percent of Russian government revenues, so you need these companies to continue to renew throw off cash flow to fund whatever the regime wants to do.”